The incidence of the WCR on the Cash

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Starworld Group End of Year   Year 1 Year 2 Year 3 Accounts Receivable 232 278 362 Inventory 97 116 151 Prepaid expenses 35 20 55 Total 364 414 568 Accounts Payable 116 139 181 Accruals 36 45 55 Total 152 184 236 WCR 212 230 332 Annual requirement of funds   18 102

A positive WCR means a net requirement of funds.

WCR increases with the firm's sales (20 % in year 2 and 30 % in year 3) even if it has

more or less the same Inventory turnover, Collection period andSuppliers' credit terms.

Starworld Group Year 1 Year 2 Year 3 Sales 2 784 3 341 4 343 Increase in sales - 20% 30% Cost of sales 696 835 1086

 

End of Year   Year 1 Year 2 Year 3 Inventory turnover in days ? 47 45 Collection period in days ? 28 27 Suppliers' credit terms in days ? 56 54

 

This example shows that even if the firm has a very high sales's growth, it can meet strong cash difficulties if it has not forcasted this new financing need : 18 in year 2 and 102 in year 3.

 

Sources :

Understanding Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University.

Interpreting and using Financial Statements, 1999,Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Ecole Hôtelière de Lausanne, 2010